The Stimulus
| Mon Jan. 12, 2009 9:10 AM PST
THE STIMULUS....From the same Washington Post article about the Bush economic record that I quoted below, we also have this:
"The expansion was a continuation of the way the U.S. has grown for too long, which was a consumer-led expansion that was heavily concentrated in housing," said Douglas Holtz-Eakin, a onetime Bush White House staffer and one of Sen. John McCain's top economic advisers for his presidential campaign. "There was very little of the kind of saving and export-led growth that would be more sustainable."
"For a group that claims it wants to be judged by history, there is no evidence on the economic policy front that that was the view," Holtz-Eakin said. "It was all Band-Aids."
Agreed — and this is what continues to niggle at the back of my mind. A big stimulus package is all well and good, but suggestions that it should be even bigger and badder than Obama has proposed make me wonder what the end game is. Paul Krugman, for example, criticizes the $800 billion plan on the grounds that it will only make up for part of the output gap caused by the recession, not all of it. 
But aside from the practical question of whether we could effectively spend double the amount Obama is proposing anyway, I guess I wonder if we should even be trying to make up the entire output gap with domestic spending. Because there really is some readjustment that needs to happen in the medium term.
For years now the the skyrocketing U.S. trade deficit has been Topic A among economists. The big fear was that the Chinese were shipping us goods and we were shipping them back treasury bills, and this couldn't last forever. Eventually the Chinese would tire of stockpiling treasuries, the dollar would crash, and all hell would break loose. In the end, that's not what happened, but it was still the trade deficit that was at the heart of our problem: American consumers went into deep debt to buy all those Chinese goods, the savings glut from China and elsewhere poured into the American housing market, and eventually the music stopped. The dollar didn't crash, but housing and the American consumer did.
But the dollar could yet crash, because one way or another the books have to balance. Americans have to consume less and export more. Keeping American output high is important, but one way or another American consumption has to fall and Chinese consumption has to grow. If a gigantic stimulus plan keeps output high but also keeps consumption high, then it's just another Band-Aid.
So what's the end game? Hardly anyone wants to talk about it. And I feel sort of stuck. I'm not an economist myself, and virtually every economist I respect is on board with the idea that the Obama stimulus package is, if anything, too modest. It should be twice as big and last twice as long. Better safe than sorry. That's hard to argue with, but I still wonder where it's going to leave us in a few years. With a nice soft landing as the dollar rises but doesn't implode, or at the top of yet another bubble waiting to pop?
Continues Below
Continued From Above
Comments
Submitted by Calvin Jones and the 13th Apostle (not verified) on Mon Jan. 12, 2009 9:02 AM PST.
That's hard to argue with, but I still wonder where it's going to leave us in a few years. With a nice soft landing as the dollar rises but doesn't implode, or at the top of yet another bubble waiting to pop?
Any non-wingnut economist will tell you that inflation is coming. It's just a matter of when.
It doesn't make any sense to leave an output gap in place on fears that it would result in a continuation of the trade imbalance. That would just leave productive capacity idle for no good effect.
Policy should be to increase infrastructure investment to make up the gap since most of this would tap domestic resources.
But the basic point is correct, Americans consume too much. I think the solution to the trade imbalance is to have Americans "consume' more public goods -- like better roads, schools, mass trans,etc. -- and consume fewer private goods -- like autos and electronics. This would boost consumption of domestic output and reduce imports.
A national consumption tax might do the trick.
If the dollar goes down our exports might be more competitive. Jets, Movies, food, construction equipment, and weapons. What else do we export? Cotton? I hope the world decides to stock up on Hollywood movies and popcorn rather than fighter jets
How about a tax on American corporations of $100,000 per year for each job outsourced to a foreign country?
The low price of Chinese goods is an illusion that is sustained by a lot of hidden costs. The labor content of many manufactured goods is so small that cheap Chinese labor is less of an advantage than you might think. And those Chinese workers will not go on forever without an increase in their standard of living.
1) A new bubble could conceivably work as a stalling tactic while longer-term growth strategies are put into place.
2) I wouldn't say "virtually every economist [you] respect" wants a bigger stimulus package, unless you don't respect tyler cowen, arnold kling, and greg mankiw.
3) I think you would do well to highlight blog posts along these lines, at least as much as highlighting Krugman's points.
From: http://www.atimes.com/atimes/Global_Economy/KA13Dj04.html
"The grim reality of course is that when the real estate bubble burst the government was able to "bail-out" private parties. However, when the bond market bubble bursts, it will be the US government itself that will be in need of the mother of all bailouts. If US taxpayers or foreign creditors are unwilling or unable to pony up, and if the nightmare hyperinflation scenario is to be avoided, default will be the only option."
It is doubtful the problem of over consumption through debt can be resolved with more debt to restart more over consumption. It is more likely increasing public debt will further erode American living standards.
Exactly right Kevin. No one has come out and said what, after whatever stimulus is made, the economy *should* look like. I believe there is an implicit assumption that it should like the "good old days", where Americans spent like drunken sailors.
However:
(1) middle class wage growth was very weak, stagnant, or actually decreased in real terms
(2) a lot of spending was from "equity" withdrawal from housing
(3) a lot of spending was funded by credit card debt
Given 1, 3 is not sustainable. We already see the effects of 2 (and 3 for that matter). I believe that regardless of the size of the stimulus, it's not possible to go back to the way things were, nor is it even desirable.
I think the economy will have to undergo fundamental restructuring before we return to prosperity, however that will be defined.
The whole thing with injecting liquidity into banks so they make more loans is foolish. What if people DON'T WANT to take on more loans (debt)? You can't force people to borrow.
I am hoping that the stimulus package will lead to a large increase in green technology related exports, in both goods and services. Obviously the global demand will be huge, so if we get back in the game and become technology leaders, we can tap that market. Same hopefully for biotech. We'll never again be big exporters of any low tech manufactured products or commodities, so we have to do it in high tech areas where US education and infrastructure give us the advantage. And hopefully the Chinise will start consuming more as their economy and middle class continues to develop. Whether any of this will be large enough to make up the import export gap I have no idea, but this is the year of Hope right?
Kevin Drum: For years now the the skyrocketing U.S. trade deficit has been Topic A among economists.
LOL!
Some economists have emphasized this (e.g. Brad Setser, Dean Baker), but mostly we heard the same "party on" that we did about the housing bubble. This blog is no different.
Of course there are those of us who've been screaming about the trade deficit for over 10 years (it started to go nuts in the latter years of the Clinton administration). Is this an "I told you so"? Yes. Are I an economic genyus? Hardly. All that was required was putting aside your economic fantasy think and saying "2+2=5, eh, maybe not".
Fixes? The main thing is to reduce the exchange rate of the dollar. Don't like it? Afraid of inflation? Tough. I don't like the law of gravity either, but you can't get around it.
kahner: We'll never again be big exporters of any low tech manufactured products or commodities, so we have to do it in high tech areas where US education and infrastructure give us the advantage.
Spot on.
And hopefully the Chinise will start consuming more as their economy and middle class continues to develop.
Partly that's a matter of Chinese government policy, which has got to change.
The excess consumption has become a structural feature of the US economy. There are economic methods to deal with the problem, however they all lead to what americans perceive as a reduction in personal comfort. So we add band aids and hopefully protect citizens from the awful truth. The political class is avoiding a significant part of the correction needed. Increased taxes on the upper end of the middle class and the wealthy is essential, for both economic and political reasons. There needs to be a political acceptance that business as usual is not possible and that capitalism's growth model needs a reassessment.
The stimulus should be paid for with fines, fees and sur taxes on the upper 20% of wealth holders, rather than with increased public debt. That kind of stimulus financing might work to raise median wages and restore the consumer economy, which stimulus funds financed with increased pubic debt will probably not do.
It's not politically correct, but big tariffs on imported junk would go some way towards balancing the budget and making it more profitable for companies to make said junk in the US. Free trade is a race to the bottom, and we're falling fast.
One of my greatest worries is that both Rubin and Summers are 1990s free marketeers who don't believe the US should have a real industrial policy. Every other country in the world has one and it is generally based on the notion that their industry will sell trinkets to stupid Americans. The old style free marketeers (the people who thought we could maintain a company on financial services alone) were wrong in the 1990s and that they are allowed anywhere close to the reigns of government gives me real pause.
We have CEOs getting obscenely rich by selling Americans things we don't really need. If they would slow their mindless pursuit of wealth for its own sake and if the rest of us would forego a few of our many diversions,and if we'd all agree to invest in our infrastructure and a greener world to pass on to our kids, maybe that would heal the economy AND our souls. Oh, wait. Could that be what Obama has in mind?
Of course nobody wants to talk about it, because eventually what has to happen is America's standard of living needs to decline relative to the rest of the industrialized world. We have a sense of entitlement about our rising standard of living which just isn't in line with our potential productivity, especially as we trash our education system and waste our natural resources.
No President wants that to happen on his watch, so the band-aids will continue.
The US$ is the biggest bubble of all, the Mother of All Bubbles as it were.
Protracted austerity leading to a much more parsimonious lifestyle and the writedown of the value of entrenched wealth for all must inevitably result. The mechanism chosen doesn't really matter much. There are several options, some more repulsive than others. But the result is the same. Everyone gets poorer relative to their previous profligate lifestyle. Former aristocrats should plant turnips in their gardens right now and avoid the spring rush at the seed store.
The only way to mitigate the lowering of living standards for Americans earning at or below median wages, wage levels that have experienced no growth over the past twenty plus years, is to transfer wealth from the top 20% of income earners to them. The pain of lower living standards should be borne by those misallocated the economy's wealth in the first place.
Kevin is asking the right question,IMO. I have formulated a 4-part plan for addressing the global imbalance which is at the heart of the current crisis:
Force the Chinese (and other mercantilist countries) to stop holding down the value of their currencies.
Force (through tough negotiation) large WTO countries (e.g. China) to adopt more equitable labor and environmental practices.
Increase taxes on wealthy Americans.
Improve U.S. health care financing system to increase competitiveness of U.S. employers and decrease risk to households.
W and wahoofive have some important (but inconvenient) points to make. We have been living beyond our means, because we didn't want to admit that the old BAU (business as usual) model was no longer delivering the desired level of growth. As our deficit driven economy unwinds, we as a nation will have to adjust to a lower level of wealth than we had fooled ourselves into believing we actually had.
One of the fundamental reasons we weren't able to maintain a high real growth rate was that the world was running into fundamental Malthusian resource limitations. We have to concentrate on (human) utility per unit of primary resources, or else the end game will be Malthusian decline.
For those that want to pull back on trade, or try to impose better terms with our trading partners, you need to review your history books, paying special attention to Hawley-Smoot. Trade is a two way street. All players are myopic. They see their partners unfair practices (real or imagined), but never their own. You can end up opening a very nasty can of worms if you are not careful.
Kevin Drum >"...because one way or another the books have to balance...."
That is only true if one is living in the real world and not the delusional world of currently existing monetary systems that ignore "externalities"; those things in the real world that support the ignorant human behavior of the last few hundred years.
Debt is one sign of how much the current monetary systems fail in accounting for things. Of course I don`t think any real change is going to occur until after all the orthodox Band-Aids have been applied and failed. This will most likely take a few years so prepare for more turbulance twixt now & 2011 at minimum.
An economic system based on reality begins with this work.
Time for real change and not just shuffling the deck chairs around on the sinking dominant paradigm.
"...it's the end of the world as we know it and I feel fine..." - REM
The economic conventional wisdom has been so very, very wrong.
It is this same conventional wisdom that tells us that import tariffs will Destroy The World.
Even as this same conventional wisdom either winks at Asian mercantilism or is helpless in the face of it.
Methinks it is time to discard conventional wisdom and impose import tariffs.
Then the bad news becomes good news: the fact we import so many things that we need means that domestic manufacturing will have to increase to meet that need. Voila, jobs!
Blech, most of ya'll want to destroy the US economy - whether it is tanking the dollar, jacking up tax rates all across the board, mandating reductions in consumption, what have you.
These views are neither liberal nor particularly leftist. I hope that ya'll at least are getting paid by nations like China and Russia to write this stuff, because if you're just repeating the crap these other nations pollute into our mediastream, that would be sort of pathetic :-/
I have formulated a 4-part plan for addressing the global imbalance which is at the heart of the current crisis:
1. Force the Chinese (and other mercantilist countries) to stop holding down the value of their currencies.
2. Force (through tough negotiation) large WTO countries (e.g. China) to adopt more equitable labor and environmental practices.
3. Increase taxes on wealthy Americans.
4. Improve U.S. health care financing system to increase competitiveness of U.S. employers and decrease risk to households.
Posted by: Detroit Dan on 01/12/09
Excellent except that forcing another country to do things isn't really kosher.
Another problem is that Americans have had their standard of living depressed by Reaganomics for 30 years and yet today we don't need a much stronger dollar -- we need a dollar which lets us export more. So, getting the Chinese to unleash the consumer power of their public could help us tremendously. They are very slow to allow change in their country, so our solution seems very far off in the future.
In short, what we seem to need here in America is a Liberal-style government of aggressive help for the poor, higher taxes on the Rich, more government product and an aggressive foreign policy to get other countries to consume more of our intellectual goods.
That's 'big government' Dem style except it doesn't include much greater spending power for the American consumer. What a bummer!
We need greater domestic production for export AND greater domestic production for domestic consumption. that way we might get the trade imbalance in hand AND help the American people to have a better standard of living. It's a bit paradoxical.
What could we begin to produce more of for domestic consumption that would slow consumption of foreign goods? Electronics? Chocolates? Clothing?
It seems we shouldn't have shipped all our manufacturing overseas.
A trade imbalance can be fixed either by increasing exports or increasing savings. People in america don't save because, by policy, it yields a negative rate of return. How about making the first $10,000 of interest income tax exempt?
I do wish that those economists who are pressing for a bigger stimulus package would outline what they see as the major risks and downsides of said increase. They write as if the stimulus simply comes for free... (however I suspect that they don't really want to provide any ammunition for those who oppose the stimulus).
Good points. Clearly we need an industrial policy other than every man for himself.
1. We need to roll back the Bush and Reagan tax cuts. Low taxes encourage people to take money out of companies and force them to look at the short term. High marginal taxes encourage people to leave the money in the company where it grows the business.
2. We need to strengthen unions. Since Reagan the government has been at war with the middle class.
3. We need to look at reasonable tariffs. This opens a can of worms to be sure, but we have swung too far in the direction of unprotected borders that benefit some large multinationals but not our country. For hundreds of years our government funded itself with tariffs. Even Adam Smith called for tariffs to protect domestic industries when two countries both produced the same goods.
4. We need to be strict about not allowing illegal aliens to work here. That would stop them from undercutting US workers' wages.
I am getting the feeling that the United States will very soon be in a condition such that it will never again be able to dictate that it receive favorable terms of trade. In other words, pitiful helpless giantism is just around the corner. Few countries are, or are likely to be in the future, inclined to help (given the grossly offensive behavior of the last 3 decades in the trade and military spheres). Suggestions to "force" China to do anything are just laughable given the pile of dollars they are sitting on. The stash can be used as a weapon and if it is the results will be truly catastrophic. I just don't see any way this can end well. We may well be on the downslope to a Malthusian cull fellow lemmings.
I think the American national debt and the deficits represent the mother of all bubbles. The economists who claim that it doesn't matter and can just be ignored simply don't know what they're talking about. It's only a matter of time before this bubble bursts, and when it does it's going to make all of the other crashes seem like absolutely nothing at all.
It is possible that we are reaching peak oil about now (give or take a few years). If oil production rates start to drop off then oil prices will skyrocket causing shipping rates to skyrocket. It will no longer be economical for companies to import cheap goods from China and India. They'll have to be made at home. This may make all the talk about tariffs pointless. The problem may solve itself.
Of course, if oil goes north of $200 a bbl we'll have other problems to deal with.
Submitted by Robert Waldmann (not verified) on Tue Jan. 13, 2009 3:30 AM PST.
I absolutely agree with you. Krugman has a little model which says expand till unemployment is 4.8% (unless you have to spend on really ridiculous things to get there). It is, however, set in an economy which is perfect except for a recession and liquidity trap.
Before the crisis Krugman wanted a big tax increase to get the US to stop consuming beyond our means. Now he's set that issue aside, but the federal debt doesn't care what is the topic of Krugman's latest blog post.
Oh above you propose a tax cut to achieve long term econmic health. I assure you, that's backwards.
Kevin, you have it exactly right when you said "... it was still the trade deficit that was at the heart of our problem: American consumers went into deep debt to buy all those Chinese goods, the savings glut from China and elsewhere poured into the American housing market, and eventually the music stopped. The dollar didn't crash, but housing and the American consumer did." The trade deficit is the root cause of the global economic collapse. It should have been obvious to anyone that the party would end when the supply of American assets, sold off to finance the trade deficit, was depleted.
However, you're wrong to blame this on China or to believe the problem can be fixed by consuming less and exporting more. When you express our trade deficit in per capita terms (divided by the nation in question), you find that the deficit with China is rather unremarkable - 19th on the list. The per capita deficit with many other nations, like Japan, Korea, Germany and others, is worse - some much worse. In fact, Ireland is no. 1 on the list. My point is not that the deficit with China isn't a problem, but rather that our trade results with China are exactly what we should have expected when we suddenly applied a trade policy that was a proven failure all over the world to a nation with one fifth of the world's population. China isn't the problem. The problem is our own trade policy.
You say we should consume less and export more. First of all, the problem is not that we consume too much. Stand in the middle of WalMart and look around. You won't see any luxury items there, but virtually everything you see is foreign made. Even our basic necessities are foreign-made, so cutting consumption isn't the answer.
Neither is "exporting more." We have absolutely no control over exports. However, we have total control over imports. All we need to do is return to the trade policy we used successfully to maintain a balance of trade for the first 171 years of our nation's history - tariffs.
I think you may find my book on this whole subject very interesting. "Five Short Blasts: A New Economic Theory Exposes The Fatal Flaw in Globalization and Its Consequences for America" is about a new economic theory on this whole subject. (By the way, the cover of the book bears a remarkable resemblance to the photo included in your post!)
If you're interested in learning more about this important new economic theory, then I invite you to visit either of my web sites at OpenWindowPublishingCo.com or PeteMurphy.wordpress.com where you can read the preface, join in the blog discussion and, of course, buy the book if you like. (It's also available at Amazon.com.)
Please forgive me for the somewhat spammish nature of the previous paragraph, but I don't know how else to inject this new theory into the debate about trade without drawing attention to the book that explains the theory.
Pete Murphy
Author, "Five Short Blasts"
Stimulus?
Submitted by Tim (not verified) on Sun Feb. 15, 2009 10:18 AM PST.
How is the stimulus being financed? I've read many sources that indicate foreign investors are pulling their money out of the US. Doesn't that mean that the stimulus will be paid for largely by the US government printing the money?
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